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The Redeeming Features Of Redemption Fees

Investors put off by mutual funds having redemption fees may want to reconsider: The penalties strapped on folks who exit the funds too quickly may benefit investors with more staying power.

Mutual funds in such emerging markets as Asia and Latin America are among the 150 or so that carry redemption fees to curb excessive trading. The fees typically range from 1% to 2% on shares cashed in within the first three months to a year. Scudder Latin America and T. Rowe Price Latin America, for instance, levy 2% fees on shares held less than 12 months. And Fidelity's Emerging Markets, Latin America, and Southeast Asia funds charge 1.5% for bailing out in the first three months.

Individuals often shy away from funds with redemption fees, confusing them with back-end loads, the sales commissions incurred when they sell shares. Yet unlike commissions and other fees pocketed by management, redemption fees are typically reinvested in the fund, where they may boost returns. "It's a fair fee that's looking out for all investors," says Don Phillips at Morningstar Inc. in Chicago.

The fees compensate investors who stay put for the actions of the few betting on short-term price gyrations. "Redemption fees send a message that people should not enter these funds with the idea of making a killing in three months and getting out," says Dan Gross, director of marketing at Scudder Stevens & Clark funds.

"ONEROUS"? Fees make most sense in funds focusing on volatile and thinly traded markets. Fund managers investing in emerging markets can have a hard time redeeming the shares of fleeing investors. And funds that invest in the junk-bond market are also adding redemption fees. T. Rowe Price Associates Inc. imposed a 1% fee on shares of its High-Yield Fund purchased after July 3, 1993 and held less than a year.

While mutual-fund companies say such fees aren't onerous, "redemption fees do reduce your flexibility," notes Sheldon Jacobs, editor of the No-Load Fund Investor. He tells investors to generally steer clear of funds with fees levied after more than six months.

Redemption fees have been around--and unpopular --for about 10 years. In fact, Baron Asset Fund and FAM Value Fund, which focus on small-capitalization stocks, dropped the fees in 1992 because managers found they inhibited sales. Perhaps redemption fees are like a spoonful of medicine--hard to swallow but good for you in the end.TABLE: FUNDS WITH REDEMPTION FEES